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Agora (NASDAQ:API) Q2: Full Year Guidance Drops And Shares Follow


Full Report / August 09, 2021
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Communications infrastructure platform Agora (NASDAQ:API) reported Q2 FY2021 results topping analyst expectations, with revenue up 24.8% year on year to $42.3 million. Agora made a GAAP loss of $15.3 million, down on its profit of $3 million, in the same quarter last year.

Agora (API) Q2 FY2021 Highlights:

  • Revenue: $42.3 million vs analyst estimates of $41.2 million (2.56% beat)
  • EPS (GAAP): -$0.14
  • The company dropped revenue guidance for the full year, from $180 million to $160 million at the midpoint, a 11.1% decrease
  • Free cash flow was negative -$11.54 million, compared to negative free cash flow of -$7.98 million in previous quarter
  • Net Revenue Retention Rate: 110%, down from 131% previous quarter
  • Customers: 2,449, up from 2,324 in previous quarter
  • Gross Margin (GAAP): 61%, up from 58.1% previous quarter

Founded in 2014 by former engineers at WebEx and based in China, Agora provides a cloud platform that makes it easy for developers to integrate real-time audio and video functionalities in their apps.

Developers often have limited time and resources when creating software applications. Agora’s software makes the process of building high quality voice and video functionality into web applications faster and more cost effective. Using easy to install blocks of code and integrations with a wide network of third-party apps, Agora simplifies the complex part of the work so that its customers can focus on building other parts of their application.

For example, the audio-based social network, Clubhouse, which took off during the Covid pandemic, was supposedly built on Agora within a week by only a couple of developers.

Students, content creators, and other web users with limited budgets can also use Agora to bring their creative ideas to life. With Agora, Yoga and gym instructors can now include live audio and video streaming functionality into their apps to manage classes, monitor their students and correct them when they make the wrong moves.

The company relies on its software technology to efficiently route network traffic via data centers distributed across the globe. This means that users with a slow network can also have a seamless experience when using video and audio streaming applications powered by Agora.

The demand for audio and video functionality inside apps is growing, and making tools for developers is a good business to be in.

Agora’s competitors include Twilio (NYSE:TWLO), Tencent, and Vonage.

Sales Growth

As you can see below, Agora's revenue growth has been impressive over the last year, growing from quarterly revenue of $33.9 million, to $42.3 million.

Agora Total Revenue

This quarter, Agora's quarterly revenue was once again up a very solid 24.8% year on year. But the growth did slow down compared to last quarter, as the revenue increased by just $2.1 million in Q2, compared to $6.97 million in Q1 2021. We'd like to see revenue increase by a greater amount each quarter, but a one-off fluctuation is usually not concerning.

Analysts covering the company are expecting the revenues to grow 38% over the next twelve months, although we would expect them to review their estimates once they get to read these results.

Customer Growth

You can see below that Agora reported 2,449 customers at the end of the quarter, an increase of 125 on last quarter. That is a bit slower customer growth than what we are used to seeing lately, suggesting that the customer acquisition momentum is slowing a little bit.

Agora Customers

Product Success

One of the best things about software as a service businesses (and a reason why they trade at such high multiples) is that customers tend to spend more with the company over time.

Agora Net Revenue Retention Rate

Agora's net revenue retention rate, an important measure of how much customers from a year ago were spending at the end of the quarter, was at 110% in Q2. That means even if they didn't win any new customers, Agora would have grown its revenue 10% year on year. Despite it going down over the last year this is still a decent retention rate and it shows us that not only Agora's customers stick around but at least some of them get increasing value from its software over time.

Profitability

What makes the software as a service business so attractive is that once the software is developed, it typically shouldn't cost much to provide it as an ongoing service to customers. Agora's gross profit margin, an important metric measuring how much money there is left after paying for servers, licences, technical support and other necessary running expenses was at 61% in Q2.

Agora Gross Margin (GAAP)

That means that for every $1 in revenue the company had $0.61 left to spend on developing new products, marketing & sales and the general administrative overhead. While it improved significantly from previous quarter this would still be considered a low gross margin for a SaaS company and we would like to see the improvements to continue.

Key Takeaways from Agora's Q2 Results

Since it has still been burning cash over the last twelve months it is worth keeping an eye on Agora’s balance sheet, but we note that with market capitalisation of $3.41 billion and more than $826.6 million in cash, the company has the capacity to continue to prioritise growth over profitability.

We were very impressed by the strong improvements in Agora’s gross margin this quarter. And we were also excited to see it that it outperformed analysts' revenue expectations. On the other hand, it was less good to see the deterioration in revenue retention rate, there was a slowdown in customer growth and most importantly, the company dropped revenue guidance for the full year. Zooming out, we think this was a mixed quarter. The company is down -3.66% on the results and currently trades at $28.49 per share.

Is Now The Time?

When considering Agora, investors should take into account its valuation and business qualities, as well as what happened in the latest quarter. We think Agora is a good business. Its revenue growth has been exceptional. And while its gross margins show its business model is much less lucrative than the best software businesses, the good news is its very efficient customer acquisition hints at the potential for strong profitability, and its customers are increasing their spending quite quickly, suggesting that they love the product.

The market is certainly expecting long term growth from Agora given its price to sales ratio based on the next twelve months is 16.2. There is definitely a lot of things to like about Agora and looking at the tech landscape right now, it seems that it doesn't trade at an unreasonable price point but there is a lot of uncertainty around the Chinese market at the moment.

The Wall St analysts covering the company had a one year price target of $56.2 per share right before these results, implying that they saw upside in buying Agora even in short term.